Companies took out 11% more in long-term loans in January than a year earlier

Demand from households for loans remains strong

The growth in car leases to households is boosted further by the effect of tax changes

While borrowing increased strongly, bank deposits were also up over the year by 10%

Estonian companies borrowed actively in January 2018 from banks and lease companies operating in Estonia, like at the end of the previous year. Investment by companies in fixed assets has increased and this is mirrored in an increase in borrowing activity. The 198 million euros of new long-term loans and leases was 11% more than was issued in the same month a year earlier. Companies in almost all sectors took out more long-term loans than a year previously. The portfolio of corporate bank loans was smaller than a year earlier however, as one bank transferred a part of its loans to the portfolio of its foreign parent bank in the autumn. Without this the portfolio of corporate loans, leases and factoring would have grown by 6-7% over the year.

The borrowing activity of households also remained strong in January. New housing loans worth 93 million euros were issued, which was 17% more than in the same month a year earlier. The portfolio increased by 6.7% over the year. New car lease agreements were signed at a particularly fast rate, and their value was 57% more in January than a year previously. The portfolio of car leases grew by 17%. Car leases to households have been affected in recent months not only by the rapid growth in incomes, but also by the change that came in from the start of 2018 to the taxation of vehicles owned by companies, which has affected the lease agreements on company cars and led private individuals to take them over. A little more was taken in overdrafts and credit card loans than a year earlier, and the stock of such loans increased by 2.2% over the year.

The average interest rates on new loans rose a little in January. The average rate on new housing loans fell in the last quarter of last year, but rose again in January to 2.4%, which is more or less the same level as in the middle of last year. The average interest rate on new long-term corporate loans rose to 2.7% in January. The average interest rate largely depends on which companies have signed which loan contracts for which projects in the particular period. Tight competition between banks has led interest margins on loans to large companies to fall in recent years, and at times this has also substantially affected the average interest margin. There has however been no noticeable general fall in the interest margins for companies.

As companies and households have borrowed extensively, so financial buffers have also continued to increase. Corporate deposits in banks operating in Estonia declined a little in January to 6 billion euros, but they increased strongly by around 10% over the year. The growth in household bank deposits is affected by the relatively rapid growth in incomes. Household deposits were up 9.7% over the year in January at 6.9 billion euros.

While borrowing increased strongly, bank deposits were also up over the year by 10%

The number of international payments rose faster in the final quarter of last year than the number of domestic payments did

The majority of domestic payments are card payments

The rise in the numbers of domestic and international payments was largely driven by card payments

Estonian residents and companies made an average of 1.34 million payments per day in the fourth quarter of 2017. The total turnover of payments per day was 558 million euros. Residents of Estonia are using bankcards more and more in shops at home and abroad and in online stores.

Domestic payments accounted for 91% of the number of payments and 72% of the turnover. That is equal to 1.2 million payments per day and a total turnover of 399 million euros. Domestic payments are those where both the buyer and the seller are in Estonia and 7% more such payments were made in Estonia than in the same quarter of the previous year. Some 65% of all domestic payments are made by card at the point of sale.

International payments accounted for 9% of the number of payments and 28% of the turnover, totalling 114,000 payments with turnover of 159 million euros. This covers payments for which the payment order is sent to a bank outside Estonia, a card payment is made abroad, or a card is used to pay in a foreign online store. At 82%, most of the international payments are card payments, and 29% more international payments were made than a year earlier.

The rise in the numbers of domestic and international payments was largely driven by card payments. Among international payments, the rise in the number made with cards over the internet stands out particularly. Cards were used abroad for purchases an average of 36,000 times a day in the fourth quarter, which was 32% more than in the same quarter of the previous year. Where available, a bank link is the preferred method of payment for Estonian online stores (1). Cards were used for 5200 purchases per day in Estonian online stores in the fourth quarter, which was 2.5 times more than in the same quarter of 2016. Bank links were used for 59,000 purchases a day in the quarter though, which was 9% more than a year earlier.

A total of 100,000 purchases were made each day in the fourth quarter through bank links and by card over the internet. However, not all purchases made through bank links are necessarily classified as e-commerce in the standard sense. An estimated 20% of purchases through bank links are of goods, 30% are of services, mainly bus and other transport tickets and cinema, theatre and concert tickets, 25% are of lottery tickets and other forms of online gambling and betting, and 25% are payments of bills and payments for financial services such as insurance or loan repayments or other payments.

Bank links can only be used for purchases from Estonian online stores. Statistics from the postal service Omniva confirm the rapid growth of e-commerce as Omniva said that the use of parcel machines in December 2017 was up 50% on December 2016. The country that is the source for the largest share of parcels is China, and the USA, the United Kingdom and Germany are also popular countries of origin.

The borrowing activity of Estonian companies and households increased last year

The average interest rate on corporate loans fell over the year but the rate on household loans rose a little

Deposits at banks grew by 9% over the year

The profits of the banking sector were supported by an increase in net interest income

Borrowing by Estonian companies from banks operating in Estonia increased in the fourth quarter of 2017. Investment in fixed assets increased last year, which was reflected in an increase in borrowing activity. The amount taken from banks operating in Estonia in new loans and leases was 10% larger in the fourth quarter than a year earlier. In total 881 million euros were taken out in long-term loans, which was 12% more than a year ago, most of them to companies in real estate, construction, transport or manufacturing. The stock of the corporate loan portfolio was smaller than in the fourth quarter of 2016 however, as one bank transferred a part of its loans to the portfolio of its foreign parent bank. Without this the portfolio of corporate loans, leases and factoring would have grown by around 6% over the year.

Borrowing by households also increased last year as incomes rose strongly and interest rates stayed low. The main growth was in housing loans and in the car lease portfolio. The value of new housing loans taken last year was 16% more than in 2016, and the portfolio increased by 6.6% over the year to 7 billion euros. The amount taken in new car leases was 20% more than in 2016, and the portfolio of leases increased by 16% over the year to 557 million euros. Overdrafts and credit card loans grew relatively modestly though, by 2.3% over the year.

The average interest rates on new loans fell in the fourth quarter of 2017. There is tight competition between banks in the corporate loan market, and this led the average interest rate on new long-term loans to companies to fall in December to below 2%. The average interest rate on new housing loans also fell in the fourth quarter having climbed in the first half of the year. The average interest rate on new housing loans issued in December was 2.3%, which is still a little higher than it was a year earlier.

The favourable economic environment and low interest rates have meant that the volume of overdue loans has shrunk. The value of loans overdue by more than 60 days in the loan portfolio had fallen to 141 million euros by the end of the year, or 0.9% of the total portfolio. The volume of overdue loans declined in most sectors. The banking sector has also made provisions of 124 million euros against possible loan losses in the future, covering 89% of the loans overdue by more than 60 days.

The deposits of Estonian companies and households grew by 9% over the year to 13 million euros. The growth in corporate deposits slowed a little in the second half of last year, but it still remained fast at 8.4% in December. Increased investment can lead to slower growth in the liquid assets of companies and so in deposits. The growth of household deposits accelerated somewhat last year, reaching a rate of 10% at the end of the year, which is the largest growth of recent years.

The banking sector earned net profit of 335 million euros in the year, which was 6% less than in 2016. Profits mainly declined because the dividend income earned from subsidiaries dropped, having been large in 2016 as undistributed profit from earlier years was paid out. Without dividend income, net profit in 2017 would have been about 13% more than a year earlier. Profit was mainly aided by the growth in the loan portfolio, which raised interest income, and by the good quality of the portfolio. About the same amount was earned in net service fee income as in 2016.

Higher incomes have increased the numbers of loan clients and of those able to save

Estonian companies largely used their own resources to fund investment in fixed assets

The growth in long-term corporate loans picked up a little, but the growth in short-term loans slowed

As demand for credit is strong, the loan liabilities of households have grown strongly. Demand for loans is supported by rapid growth in incomes, high levels of confidence and very low interest rates. The loan liabilities of households increased in the third quarter at about the same rate as wages at around 7% over the year. The stock of bank loans and leases has grown more quickly in recent quarters, but the previously very strong growth in loans from other lenders, including instant loan providers, has slowed. This is probably partly because the banks have started to issue more consumption loans and leases, and also because more effective supervision has been introduced over the operations of other lenders.

Higher incomes have made it more possible for people in Estonia to save, and savings continue to grow fast. Household deposits increased by 9% over the year, and other household financial assets like cash, securities, investment fund units and loans given out grew even faster. Despite the rapid growth, the financial savings of Estonian households in relation to incomes are still below the European Union average, and many households would not have sufficient savings to cover unexpected events.

Although investment in fixed assets increased strongly in 2017, companies in Estonia were able to use their high levels of liquid assets and own funds for most of the financing. More was taken out in long-term loans than before, and the growth over the year was a little over 5% in the third quarter of last year. At the same time the stock of short-term loans shrank sharply, largely reflecting the cash flow management of some foreign-owned companies. Total corporate debt liabilities were up 1% on a year earlier. The stock of loans taken from banks operating in Estonia declined in the third quarter of last year and the stock of loans taken from abroad increased by the same amount as one bank moved a part of its loans into the portfolio of its foreign parent. Foreign investment in equity in Estonia increased, but this largely reflects the growth in reinvested income that stems from growth in profits rather more than additional foreign investment.

The Estonian economy was a net lender to the rest of the world in the third quarter of 2017, as residents of Estonia invested more financial assets abroad than they received from there. This shows that the trend of recent years for Estonian residents to save is continuing and the level of investment in fixed assets is still relatively low despite the recent growth in the past couple of quarters.

Eesti Pank, the Estonian Banking Association, businesses and consumer protection authorities decided at the Estonian Payment Forum that it would be wise to encourage bank clients to use more modern and more secure methods of authentication rather than code cards. Some 300,000 bank clients in Estonia use code cards regularly to identify themselves.

The need to review authentication for Estonian bank clients come from the European Union directive on payment services and related legislation, which is intended to increase security and promote innovation. Estonia transposed the changes in the directive in November and added to the list of payment services the two new services of provision of account information and payment initiation. The European Union implementing regulation that will affect authentication services is expected to come into force from September 2019.

The changes will create an environment where the new payment services will let clients manage their payment accounts in different banks, view their account information, and pay for online purchases or make personal transfers securely using just one mobile app. To use such services clients will need to identify themselves using at least two separate security steps. Code cards are not appropriate for this as they are not secure enough.

The Estonian Payment Forum was founded in 2011 by Eesti Pank, the Ministry of Finance and the Estonian Banking Association. The forum aims to support development of the Estonian payment environment and to present the strategic decisions related to the Single Euro Payments Area (SEPA) of the European Union to all market participants.

People receive one and two-cent coins as change from shops but very rarely use them for paying with

Only the final total price to be paid need be rounded, not the price of each individual item

The final price could be rounded mathematically up or down to the nearest five cents

One and two-cent coins could still be used for payments, but would not be given out any more from shop tills

Opinion surveys show more than half the Estonian population are in favour of such rounding

At the Estonian Payment Forum on Jan.17 2018 Eesti Pank proposed a discussion of whether it would be reasonable in future to start rounding the final price to be paid for purchases at cash tills up or down to the nearest five cents to reduce the use of one and two-cent coins in Estonia.

“Eesti Pank issues on average two truckloads a year of one and two-cent coins that shops then give out as change and that are then used very little. The central bank believes it is worth discussing whether fewer of those coins that are very rarely used could be in circulation”, explained Madis Müller, Deputy Governor of Eesti Pank.

It is proposed that the prices of individual products or services not be rounded, but that only the final purchase price to be paid at the till be changed. The price would be rounded mathematically up or down to the nearest five cents. So if the price of a biscuit is 24 cents, two biscuits would cost 48 cents and the purchase price would be rounded up at the till to 50 cents, but for three biscuits the price would be 72 cents, and this would be rounded down to 70 cents.

Mr Müller said that the rounding at the till would not lead to any rise in prices as it would be done up or down mathematically and the seller cannot affect what people put in their shopping baskets and what the final price would be.

It would still be possible to pay with one and two-cent coins, but they would not be given out to shoppers from the cash tills. The central bank proposes that rounding would only be used for purchases paid for in cash, and that card payments would continue to use the exact price.

Rounding would need shopkeepers to make a one-off update to the software in their tills. Nele Peil, General Manager of the Estonian Retailers’ Association said that rounding is in general good for retailers and for customers. “Shop assistants will need to spend less time counting coins and on other business involving cents. Customers currently receive one and two-cent coins from shops as change, but pay with them very rarely. Low-value coins are mostly left lying around as many people find such small coins to be a nuisance. We would support a solution where the final prices for card payments at tills are not rounded, but where cash payments would be rounded mathematically, like Eesti Pank is proposing”.

Recent opinion surveys have shown that more than half the people in Estonia would support the introduction of the rules on rounding. The survey of the payment behaviour of Estonian households in September last year found that 57% of people in Estonia were in favour of rounding, 33% were opposed, and 10% could not say. The Eurobarometer survey last October found that 61% of people in Estonia were in favour of rounding, 32% were opposed, and 7% could not say.

The introduction of rounding rules has not happened uniformly across the euro area. The European Commission recommends that rounding rules should not be introduced if there is not public support for it in that country. The five countries in the euro area that have rounding rules for one and two-cent coins are Finland, the Netherlands, Belgium, Ireland and, as of this year, Italy. The experience of Finland, the Netherlands, Belgium and Ireland shows that rounding did not raise prices. There is more support than opposition for rounding in all five countries now.

The next step is for Eesti Pank to collect feedback from a range of interest groups about the proposed rounding rules.

The budget of Eesti Pank for 2018 will be 21.5 million euros without cash handling costs, which vary a lot from year to year, the budget will be 0.9 million euros, or 4.6%, larger than in 2017.

Including cash handling costs makes the central bank budget some 1.2 million euros, or 5.1%, smaller next year than this year. The costs for cash will be lower next year because the central bank already made the preparations this year for the gold and silver collector coins that will be issued for the centenary of the Republic of Estonia in 2018.

The notable entries in the central bank’s budget for 2018 are the launch of a new statistics portal, and improved cyber and physical security. Spending on information technology will also be increased by the costs of TARGET2-Securities (T2S), the single securities settlement platform of the central banks of the euro area, which Estonia joined in the last year. This means spending on IT will rise by more than 0.5 million euros, and the central bank will invest a total of 1.5 million euros in fixed assets next year.

Eesti Pank’s forecasts show that the revenues for next year for the central bank will be 33.3 million euros, the largest part of which will come from revenues stemming from the single monetary policy of the central banks of the euro area. The bank also expects to gain income from management of foreign reserves and other operations. The bank is expected to make a profit of 11.8 million euros in 2018.

Figure Eesti Pank expenditure and budget 2004-2018 in relation to GDP. The columns show the budgeted expenditure for 2017-2018 and actual expenditure for the preceding years.

Eesti Pank plans to employ 234.2 people and the payroll will increase by 2.9% to 10.2 million euros. This will allow the bank to keep salaries for staff comparable to those for similar positions in the financial sector in Tallinn, where Eesti Pank mainly competes for employees.

Background

Eesti Pank and the other central banks of the euro area are responsible for maintaining price stability in the euro area. To do this, Eesti Pank must be independent, and for this reason the bank is not covered by the state budget.

Eesti Pank aims to provide Estonian society with the highest possible quality of central banking services as efficiently as possible. One concern of the central bank is that costs should not rise as a share of GDP while the amount of work to be done remains the same. As cash handling costs can vary widely from year to year, they are not included in comparisons. The budget for 2017 was equal to 0.081% of GDP, but in 2018 it is expected to be 0.078% of GDP.